An irrevocable trust for life (ILIT) is an arrangement in law that can be used to control and own the life insurance policy. This trust cannot be relocated, meaning it cannot be modified or cancelled once established. This means that an ILIT is an effective tool for estate planning as it helps safeguard assets from taxation and predators like creditors, tax evasion, and.
What Is an ILIT?
An irrevocable life insurance trust or ILIT is a tool for financial management to oversee life insurance policies and distribute benefits upon your death. Once it is established, ILITs are irrevocable, meaning they cannot be changed or terminated.
How an ILIT Works
An ILIT typically has three participants and three parties: the grantor, trustee, and beneficiaries. Usually, the grantor acts as the individual who establishes the trust and then transfers an insurance plan to the trust. A trustee will be the one who oversees the trust and is accountable for paying the insurance plan as well as disbursing the death benefit to beneficiaries. Beneficiaries are those who get the death benefit of this life insurance plan.
Suppose the grantor makes an ILIT and then transfers an insurance life policy over to the trust. That means the trust, and not the grantor, holds the policy. The grantor cannot modify the policy, for example, by altering the beneficiary or even surrendering the policy. The trustee is accountable for paying the policy premiums and ensuring that it is still in force.
In the event of the grantor’s death, the death benefit of your life insurance policy is transferred into the trust. The trustee divides the death benefit among the beneficiaries by the trust’s rules. The death benefit isn’t included in the grantor’s estate to be used for estate tax purposes.
Benefits of an ILIT
There are a variety of advantages to making use of an ILIT to plan your estate. First, an ILIT helps to shield assets from estate tax. The death benefit that is a part of the life insurance policy generally is not part of the insured’s estate for tax reasons. This means that if the insured decides to transfer their life insurance plan to an ILIT in this way, the death benefit won’t be tax-exempt at the time of the insured’s death.
A second reason is that an ILIT helps to shield the assets against creditors. The assets held in an ILIT are stored in trust for beneficiaries, and the grantor’s creditors can’t gain access to the funds. This is crucial if the grantor has a bankruptcy or has other financial issues.
Thirdly, an ILIT helps to safeguard assets from robbers. If the grantor becomes disabled or dies or dies, an ILIT will help ensure that the funds in the insurance plan are transferred to the intended beneficiaries. This will help prevent criminals from gaining the advantage of the beneficiary or the grantor.
Drawbacks of an ILIT
There are some disadvantages when making use of an ILIT. The first is that establishing an ILIT is costly. The grantor has to pay legal fees to set up the trust and then transfer the life insurance policy to it.
In the second, the grantor loses control of his life insurance plan after it has been given to a trust. The trustee is responsible for the payment of premiums on the policy, and ensuring that it is still in effect.
The grantor might be required to pay gift tax when they transfer an insurance policy for life in an ILIT. The exemption for gift taxes is currently $16,000 for each person each year. If the recipient gives away an insurance policy for life that has a value higher than the $16,000 limit, they could be required to pay gift taxes on the higher amount.
ILIT legacy plan
Alongside tax advantages, ILITs may give you greater control over how your death benefit will be utilized. You can choose several beneficiaries and decide how and when they’re to use the money. If you choose to designate them as life insurance beneficiaries, they can use the death benefit in any way they want.
It is essential to know that federal law imposes up to 40 per cent tax for people who give assets to those more than two generations older or 37.5 years older than the person making the gift.
When to Use an ILIT
An ILIT is a valuable tool to plan your estate in many different situations. It’s an excellent alternative for those who wish to shield their assets from estate tax and predators, creditors, and creditors. It is also beneficial for those who wish to ensure that their assets in the life insurance policies are transferred to the intended beneficiaries.
If you’re considering using an ILIT, you must speak with an estate planning lawyer to discuss the specifics of your circumstances. An attorney can assist you in deciding if an ILIT is the right choice for you, help you set the trust, and then transfer the life insurance policy into it.
Here are a few additional points to think about when deciding whether you want to make use of an ILIT
- Your health and age. If you’re aged, or in poor health, you are more likely to utilize an ILIT to protect your wealth from estate tax.
- The amount that your estate is. If you have a large estate, it is more likely to utilize an ILIT to reduce estate taxes.
- The kind of insurance that you own. Certain kinds that offer life insurance, like universal life insurance, are better to use in an ILIT than others.
- Your state’s estate tax laws. Your state’s estate tax laws can determine whether an ILIT is the best option for you.
How Do I Set Up an ILIT?
Life insurance trusts that are irrevocable can be complicated legal entities that require a specialist to establish. It would help if you worked with an experienced lawyer, financial advisor and perhaps other experts to establish your trust effectively.
Although ILITs can be helpful, Gimbel warns that it’s crucial to understand the assets of the estate and the purpose of the ILIT.
“The best method to accomplish effectively is to establish your board of directors, which includes an insurance advisor trust and estate attorney and CPA who work together to ensure you have the best planning.